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SA Inc should take less and make more

COMPANIES and institutions are complex social systems and therefore difficult to manage. Consider the huge and rapid changes of recent decades, the even greater ones in years to come, and people become more important than ever to success.

Despite this challenge, and its diligent efforts over the years, the human resource (HR) function struggles to position itself in management ’s mainstream.

That’s probably one reason why the Boston Consulting Group (BCG) and the World Federation of Personnel Management Associations recently surveyed the views of nearly 5 000 executives in 83 countries and markets. They published a report of their findings and called it Creating People Advantage — How to Address HR Challenges Worldwide Through 2015. It covers 17 topics in human resources management and lists 194 action steps to compete better through people. The three main areas of focus that emerged were:

Not surprisingly, the report concludes that the challenges are greater than ever before. That’s probably why transforming the HR function into “strategic partner” was one of the 17 topics raised. This is the “right to sit at the high table” with top management.

If HR managers want that, it seems they missed a DAZZGOTO — a dazzling glimpse of the obvious — during the survey. Productivity was not even raised. The closest to it was “performance management ” — usually this ends up as a more complex version of the dreaded, and mostly ineffectual, annual performance appraisal.

It highlights the problem HR people have. Operating managers see a need for what they do, but it tends to be a defensive one. It’s more a case of “keep us out of trouble” ( that ’s putting it politely), than anything else, and certainly not to help with productivity.

As to productivity improvement, within HR are the human resource development (HRD) specialists. These HRD people claim they already respond to the need through training, organisation development, selection, performance management programmes and incentive schemes. The belief is that improved results will follow these activities but the link is tenuous at best.

During the survey, executives in Africa identified the management of talent, work-life balance, globalisation and diversity as major issues —again nothing about productivity. The issues raised are important but the accompanying rand-dollar chart spells out the challenge and prime focus for South African managers — not least, HRD. Today, we don’t create wealth — we destroy it. The long decline in the buying power of the rand stopped in 2002 but seems about to resume its steady descent. T hat’s because it’s hard to swim against the tide of three numbers.

Our population growth is one of the world’s highest even if tempered by disease. Our inflation rate is higher than our major trading partners. Lastly, our productivity is low and falling compared with the rest of the world. That’s because a common driving value in government and corporations in SA is to “take ” money, not “make ” money.

Indeed, the way we pay people, especially managers, can even cause falling productivity. It’s all about pay and reward for size — size of the asset base, sales, costs, profit, numbers of people and growth —not productivity.

The rand-dollar chart’s wakeup call is loud and highlights a key economic principle —productivity equals wealth and is the most powerful weapon for fighting inflation.

Productivity gains allow companies to increase wages without increasing prices at the same rate. This keeps inflation below wage increase levels and grows real income and standards of living.

Moreover, HRD people with the talents they have are uniquely suited to contribute directly, significantly and measurably to productivity initiatives. However, they have to make a shift and bring meaningful metrics into play — simple ones that people at all levels can understand.

It is time for HRD to work with the finance department —another function that is largely irrelevant when it comes to productivity. If measures influence behaviour, then accountants are hugely ineffective. Most often, the numbers arrive far too late to make any difference and no one understands them anyway.

If you expect to find out if a company is improving productivity or not by reading the financials, you won’t. They mislead rather than inform. That’s why there is a flourishing trade in business school courses and finance workshops for non-financial managers. They achieve little.

In fact, accountants and HRD people share the same problem, but it is also a huge opportunity. They both battle to become genuine business partners and advisers. Their barrier is how to communicate — to present the numbers in plain, simple language for operating people with no formal training. If they did, then employees would think intelligently and suggest ways to improve them — just as they do in Toyota.

This year, in its neck-and-neck race with General Motors, it will probably take the lead and then widen the gap between the two companies. For good reason. Its employees generate one million suggestions a year. That’s around five per person. What’s more, they implement most of them — in many cases without even waiting for management approval.

Toyota has perfected a system that continually improves itself and creates huge profitability through productivity improvements. It is now the benchmark for world-class manufacturing — indeed for the profession of management. What the company shows us through its suggestions is that there is a vast, untapped reserve of potential in every organisation. The trouble is it stays hidden, and then simply fritters away because of historical accounting methods, policy and culture.

As one CEO of a major US company put it: “The three biggest barriers to continuous improvement are top management, middle management and supervisory management.” When anyone suggests a change for the better, typical reactions will be: “We’ve tried that before and it didn’t work so why don’t you go back to your workplace and get on with your job?” and: “No, that’s a silly suggestion. The savings will be too small.”

So what metrics should HRD people use to reposition themselves and help finance do the same? The first trait of the longlived companies that Arie de Geus described 10 years ago in his book, The Living Company, was that extraordinarily successful companies understand the meaning and value of cash in the bank. The second attribute was that no matter how diversified they were, people in long-lived companies felt they belonged. Case histories showed that a “sense of community” was essential for long-term survival.

This community includes not only the internal one, but those on whom the firm depends for its survival — its customers and suppliers. It means the company has to position itself to make it easy and worthwhile for customers and suppliers to do business with it. That’s the strategy part — designing your business to do that. Next is making it happen.

If you had only two measures to tell you about a firm’s health, the first is the length of the “cash-to-cash cycle” — the time it takes from paying your suppliers to the time your customers pay you.

The second measure is based on the classic sales prospecting question. You ask your customer: “Would you recommend us to your close friends and colleagues?” Trended “yes” replies tell you how well you are doing and whether or not you are going to grow.

These two measures — the cash-to-cash cycle and customer perceptions — drive productivity improvement and test the health of the firm. You can’t have many “yes” answers with high inventory turns and fast payment by customers if you aren’t doing a lot of things right.

PRODUCTIVITY is a much misunderstood and often misused concept. There is a physical and financial side to the equation. The physical side deals with quantity of input— resources and time — to quantity of output. The relationship between them defines “productivity ”. If you can get more output with the same level of input, that is a productivity gain. There are several other ways to do it.

Then there is the price of the input — what the resources and time cost — and the price of the output. This is about “price recovery”. If you increase salaries and wages by 10% but increase selling prices by less, the company suffers a price recovery loss. When you multiply the two elements (productivity and price recovery) you deal in rands. The relationship of rands input (costs) to rands output (sales) is profitability.

If your people understand these two elements, they can start to measure, analyse and make changes in the right way.

And the right thing to measure is the system, not people or processes in isolation. W Edwards Deming, father of the modern quality movement that found its genesis in Japan, saw that the typical employee worked in processes that have wasteful activity built into them. People don’t say: “I’ll go and do lots of wasteful things at work today.” Waste is already part of the system designed by management. This means HRD has to get managers to admit that all systems have waste built into them, put a process in place to identify it without blaming anybody and allow employees to eliminate it.

Eliminating waste isn’t the problem. Identifying it is. Only your people can do that—the people who actually execute the ser- SA Inc should take less and make more A great opportunity exists for HR to earn executive respect —by improving productivity, write Ted Black, Gerard van Hoek and Bazil van Loggerenberg A common driving value in government and corporations in SA is to take money, not make money vices or make the products.

Based on research by BCG and the Lean Thinking movement, the amount of time needed to execute a service, to order, to make and to deliver a product is only 5% or less of the time that the service or product spends in the system. That’s from the time you pay suppliers to being paid by the customer — the cash-to-cash-cycle. Attack the waste of time in the system — the cash cycle time — and you will gain remarkable improvements in results.

This brings us to the second trait of the long-lived company. You only get sustainable productivity when there is a strong sense of community — when all people feel they are in it together.

We take the positive view. A community is a group of people who are ready and willing to mould themselves into a close-knit team. They succeed because they:

Have a clear, “bottom- line ” goal;

Respect each other no matter how different they all are; and

Know the one thing they can never do is to let each other down. This is HRD’s prime task if it wants to “sit at the high table”—to help operating managers build communities for productivity. If they succeed in that, they will meet the prime growth needs of South African management. These are:

Vastly upgraded skills in the management of change;

The management of communication; and

The management of diversity and the conflict that comes with it.

You build communities of growing people most rapidly and sustainably when its members are “forced”, so to speak, to develop them under short-term, concrete, real-life challenges that are important to them. These challenges always lie at points of overlap between people along the value stream of activities, from supplier through to customers. That’s where you find the opportunities to lever up productivity and where you can design community-building projects.

THE question to ask that pinpoints opportunities is: “Would the customer be willing to pay for what we are doing here and now?” Answering that question means people can devote their efforts towards eliminating all the things that do not add value.

That is business acumen — being able to see and identify opportunities to make and save money.

The long-lived companies commit to people first, and physical and financial assets second. People are “the horse” and productivity is “the cart”. All it needs is to educate your people in what productivity is. As we all know, very few of them do, and that’s true from boardroom to the work place.

It is a wonderful message of opportunity for HRD people and it is how they can be part of the game of business. They will get onto the playing field as contributors to economic results. No longer will they be just observers while operating management does its thing. Moreover, they will address the prime areas of focus discussed earlier —attracting and retaining the best employees; managing change; and building a learning organisation.

Ted Black (jeblack@icon.co.za) conducts ROAM workshops. He and Gerard van Hoek are affiliates of Robert H Schaffer & Associates Bazil van Loggerenberg, from Loggic LLC, is a developer of analytics and mathematics for productivity control systems.